Estate tax planning when one spouse is not a citizen

Estate planning in order to avoid or reduce estate tax can be complicated, and it may become even more complicated if one spouse is not a citizen. The U.S. has a tax treaty with more than 70 countries, but not all of these treaties deal with estate tax. One of the first steps for determining estate tax when one spouse is a foreign national is to establish whether or not a person is considered a resident. This determination can be somewhat subjective although if people appear to have a residence in North Carolina with no intention of leaving they may be considered resident for estate tax purposes.

While using gifts as a way to reduce the value of an estate might be one solution if everyone who receives the gifts is a U.S. citizen, taxes may be incurred if a spouse is not a U.S. citizen. Determining tax can be complex, and there are a variety of possible scenarios. A better solution than gifting to a non-citizen spouse might be to create a qualified domestic trust.

A QDOT allows an exception to levying estate tax on a non-citizen spouse. However, there are a number of complex rules and regulations for setting up a QDOT. For example, either a U.S. citizen or corporation must be one of the trustees.

Planning an estate with the aim of reducing or avoiding estate tax can be complex even when both people are U.S. citizens. Doing so with a foreign spouse becomes even more complicated. A person who is creating an estate plan may want to discuss possible strategies with an attorney. Other options for reducing the value of an estate might include gifts to children who are U.S. citizens or setting up a charitable trust.